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Pros and Cons of
Licensing/Pricing Models
Jill H. Jones, J.D.
Freescale Semiconductor, Inc.
EDA Contract Manager
[email protected]
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Pros of the Perpetual License
• Perpetual usage right (pay once, run forever
or at least 20 years)
• High return on investment (ROI) if software
used more than a few years and is a major
software solution
• Ability to bail out of annual maintenance
• One time negotiation (in theory)
Cons of the Perpetual License
• Large upfront payment
• Licensed but unused software
• Stiff annual maintenance fees
• Must buy upgrades
• No access to new technology
• Limited or no remix provision
Pros of the Subscription
License for Vendor
• Predictable revenue stream
• Bundle into one fee:
– Right to software
– Automatic updates
– Postcontract customer support (PCS)
• Opportunity to expand business
Pros of Subscription
License for Customer
• Lower up front cost
• Manage cash flow (budget)
• Flexibility with shorter licensing period
• Remix allowed
• Switch to another vendor
– If business value lacks (unused software)
– If technology needs change
Cons of Subscription
License for Vendor
• Must sell value on an ongoing basis
• Less revenue upfront
Cons of Subscription
License for Customer
• Possible higher cost; Higher renewal rates
• Administrative costs increase with frequent
renewals for multiple vendors
Goldilocks Theory of
Software Licensing
• Not too much, not too little, but just right
• How to determine the actual need?
• Usage tracking
• Global float allows effective use of licenses
24/7 for distributed engineering design
• Remember: you can buy more but cannot
give back
Goldilocks Continued
• EDA ideal: charged only when the tool is
used
• Utility model; Pay as you go
• Challenges
– Revenue recognition
– Budget forecasting
– Procurement approval cycle
“Just Right” is Hard
in the EDA World
• More complex and new designs =
more complex and expensive EDA
tools
• Customer growth or reduction in
employees
– Divestiture clause in license agreement
– Mechanism to add licenses at favorable
rate
• Vendor mergers or acquisitions
– Software disappears
– Bundling into new products (new costs!)
What is Software Revenue
Recognition?
• Generally accepted accounting principles
(GAAP) for integrity of financial statements
• Software companies strive to recognize
revenue as soon as possible to meet
quarterly guidance
• Recognizing revenue too early
– Overstate revenue
– Computer associates: executives indicted for
backdating contracts; CEO resigns; Stock
plummets
Four Elements Required to
Recognize Revenue
1.
Persuasive evidence of an
arrangement exists
• Written contract signed by both parties
• No side agreements or special deals
2.
Delivery has occurred
• Electronic delivery of license keys (access
code)
• Customer takes immediate possession of
software
Four Elements Continued
3.
Fee is fixed or determinable
• Extend beyond 12 months after delivery?
• Overcome by showing history of collecting
fees under extended payment terms
4.
Collectibility is probable
• Demonstrate successful payment history
• Assign a credit limit for new customer
Optimize Revenue Stream: Recognize
Revenue Upfront
• Clearly state in contract when delivery will
•
•
•
•
occur and where
Acceptance occurs upon delivery
Most of payment must occur within 12
months of delivery
None of the license fee can be refundable
Multi element contract – software and
services as single arrangement
Optimize Revenue Stream: Recognize
Revenue Upfront
• Unspecified upgrades allowed as part of
maintenance
• No future software products (can buy more of
same products); No new technology
• No return of products; Remixes (exchange)
allowable
• Warranties cannot be viewed as cancellation
rights
Business Needs Drive
the License Model
• Corporate business need drives the license
model
• Technology matters but is secondary
• Vendor: immediate revenue recognition
bolsters cash flow
• Customer: return on investment (ROI) and
business value = software not lying idle
Perpetual License Model
ISSUES
PERPETUAL
Duration
Long, 20-99 yrs
Payment terms
Min. 75% w/in 1 yr
Revenue
Up front in full
New Technology
None
Maintenance
Separate fee
Future Business
Minimized
Term License Model
ISSUES
TERM
Duration
3 - 5 yrs
Payment terms
Min. 75% w/in 1 yr
Revenue
Up front in full
New Technology
None
Maintenance
Separate fee
Future Business
Increased by renewal
Time Based License
(TBL)/Subscription Model
ISSUES
TBL/SUBSCRIPTION
Duration
3 - 5 yrs
Payment terms
Extended payment
Revenue
Ratably over term
New Technology
Current book price
Maintenance
Bundled into fee
Future Business
Increased by renewal
Similarities and Differences
ISSUES
PERPETUAL TERM
TBL
SUBSCRIPTION
Duration
X


Payment terms


X
Revenue


X
New Technology


X
Maintenance


X
Future Business
X


How The EDA License
Model Works
• $3M TBL subscription license for 3 years =
revenue recognized $1M per year for 3
years
• $3M term license = $3M recognized upon
delivery
• $5M perpetual license = $5M recognized
upon delivery
Lessons Learned
• Customer must sell management on the
technology deal by emphasizing business
value ROI aka“what’s in it for us?”
• Customer can increase ROI by leveraging
vendor’s end of quarter revenue needs.
• Vendor must engage customer’s finance,
business, legal, and technology teams
early in the deal and show ROI.
• Vendor needs to explain contract terms in
view of revenue recognition requirements.
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